When There Is Customer Contact

There are two legal instances where the customer of our client needs to be aware of the factoring relationship. I always stress that the way this is handled is one of the most important aspects of implementing invoice factoring as a commercial finance option. They are “notification” and “verification.”

Notification means contacting the account debtor (customer) to notify them that your company has assigned the proceeds of an invoice to a third party (the factor.) Whenever a company does work for a customer and provides term payments (like 30 days,) the company is now making a loan to their customer – they did the work, the work was accepted and now the customer owes the payment. What a factoring company is doing from a legal standpoint, is purchasing that loan from you which is then payable to the factor by the customer. The notification happens once with instructions to re-direct payments to the factor. Now all parties to the transaction are aware of the terms of payment. This is usually done with a notification letter just relaying the new payment instructions.

Verification is where the factor has to see if the invoice is real. A factoring company is wiring money into the bank account of our client based on a piece of paper. We need to know the work was really completed and accepted and that the payment is coming based on the terms and conditions of the contract. The verification happens for all invoices, usually in the form of a quick phone call or email.

While these forms of customer contact may appear to be intrusive, they are handled with the utmost care to insure little or no disruption of the customer relationship. But more importantly, what this gives the client is an unlimited ability to raise capital by quickly accessing collateral sitting on the balance sheet, without having to re-apply for larger availability.